Millions of children are to be offered the opportunity to switch their savings
from so called zombie funds that were established by the previous government
into cheaper, higher-paying schemes.

Chancellor George Osborne will say, in his Budget 2013, that six million people with £4.9bn invested in these obsolete accounts will be able to switch them into newer Junior Isas - which typically offer a higher interest rates, lower charges and a wider choice of investment funds.

At the same time the gap between the interest rates paid on cash CTF and Junior Isas has widened, with the best Junior Isas now paying twice as much interest as the old CTFs.

Halifax for example offers a Junior Isa paying 6pc, while the best cash CTF now pays just 3.05pc. This difference could see children lose more than £34,000 in interest payments over 18 years - if the maximum contributions were paid into both.

The consultation will look at whether transfers should be voluntary or mandatory. It is understood that the Treasury wants parents to have more choice over how their children’s savings are invested.

The move has been welcomed by high street banks, fund managers and consumer groups. Child Trust Funds, launched in 2005, were one of New Labour’s flagship schemes. All children born after September 1 2002 received a free £250 voucher from the Government to be invested into a deposit account or investment plan.

But these vouchers were withdrawn by the Coalition Government, who said such payments were unaffordable and had failed to kickstart the savings habit. Most CTFs are essentially “dormant", with no further savings made to the initial £250 investment.

In 2011 CTFs were replaced by Junior Isas, which like CTFs allow parents to save up to £3,600 a year, tax-free. In both cases savings cannot be cashed in before the child’s 18th birthday.

However, as providers don’t have to run millions of essentially dormant accounts, Jisas offer more competitive terms and rates.

According to figures from HM Treasury almost eight out of 10 CTFs – worth some £4bn – are invested in stakeholder plans. The majority of these charge the maximum annual fee of 1.5pc, despite being just a basic stock market tracking fund. It is possible to buy the same tracker fund through a Junior Isa for annual charges of just 0.27pc a year.

Richard Marriott, head of savings at Nationwide, said: “Nationwide is in favour of any initiative that encourage parents and young people to save and so we feel the Government should give all parents the choice of keeping their money where it is or by moving it to a Junior Isa."

Mark Till, head of personal investing at Fidelity Investments, said he welcomed the change. "We have had a lot of customers contacting us wanting to switch, which you have not been able to do until now," he said. "Junior Isas are a lot more attractive, offering greater flexibility and a far wider investment choice. They are the best option for parents looking to build long term savings for their children."